“Bullfighting is the only art in which the artist is in danger of death and in which the degree of brilliance in the performance is left to the fighter’s honor.” Earnest Hemingway
“You got me so I don’t know what I’m doin’” You Really Got Me, The Kinks
Markets opened sharply lower Monday after Moody’s downgraded the U.S. credit rating from AAA to AA1, citing the government’s surging debt service costs. While the downgrade marks only the third such event in modern history, following similar moves during the credit crises of 2008 and 2011, it added a note of caution to a market already grappling with overbought conditions and extreme sentiment (which we will look at in tomorrow’s report).
Despite Monday’s large downside gap, stocks mounted a recovery by the close, leaving an outside day up in the SPX and the Q’s. Both closed at new highs for the move.
The SPX edged up 6 points on Monday while the Q’s closed up 0.50.
Be that as it may, the SPX closed 68 points off session lows on Monday with the Q’s reversing 8 points off their low.
Underneath the surface, breadth was negative with the NYSE recording 338 more declining issues than advancers.
The NAZ showed a modest positive tilt with 73 more stocks up than down.
While the rally remained technically intact on Monday the internal weakness and pressure persists with the SPX and NAZ closing lower and internal metrics confirmed with a late decline on Tuesday.
Market breadth was negative across the NYSE and NAZ: The McClellan Oscillators have now rolled over decisively.
In fact Tuesday was well on its way to tracing out not only the narrowest range day since the April 7 low, but the narrowest range day of the year before a late day sell off expanded the range.
A late day Rule of 4 Sell on the 10 minute intraday basis saw a sharp 30 point SPX downdraft.
An equally sharp rebound saw the SPX backtest the breakdown pivot.
The daily pattern on the SPX reminds me of the vertical run into late January 2018 prior to a Flash Crash.
The SPX capped off a vertical run with a large range high tick close on January 26, 2018
The next day was an inside down day.
The next day, January 30th the SPX gapped down to kickoff a Flash Crash.
While the SPX paused for two days after the Breakaway Gap the next session, the handwriting was on the wall; the next session the SPX gapped below its 20 day moving average with authority.
The following session saw the SPX plunge below its 50 day line.
Within just 10 trading days, the SPX had tested its 200 day moving average from one of its most extended rises above its 200 dma ever.
It was a reversion to the mean for the ages gaining the name Volmageddon for its trouble.
The outbreak in volatility produced a year of volatility culminating with a Christmas Crash in 2018.
As above so below: the year ended as it began—with a crash.
In sum, Volmadeddon 2018 destroyed all the breakouts on the way up. It knifed through all support levels…like all good Flash Crashes should.
Let’s compare this with the current pattern here in 2025.
Following a vertical run the SPX closed with a large range high tick close on Monday, like late January’s top in 2018.
Yesterday we got an inside down day. Like the day after the top in January 2018.
The big difference between the two patterns is where the index is in regards to its 200 dma.
As offered, in 2018, the SPX was cruising historically above its 200 dma.
Here in 2025, the SPX’s rally off a waterfall decline (versus a vertical run) has produced a recovery above its 200 dma with a recent SEVEN day spike above the 200 dma.
Is the spike a Starburst pattern marking a Secondary Top or does it mark momentum in part of a leg to new all time highs?
With the market stretched, the normal expectation would be a correction to test the 200 day moving average currently at 5765.
This would satisfy a kiss of Phil D Gap from the Swiss Version of Let’s Make A Deal on Monday May 12th.
Breakage below the 200 dma and the open gap underpins the idea that a Secondary Top, a Wave 2 rally, has played out.
A failure below Monday’s upside reversal low of 5895 opens the door to a Reversal of a Reversal or what I call Keyser Soze.
Rumor has it that the Keyser is getting suited up in a Matador’s outfit with this morning’s gap down.
Roadmap for May 21
after the opening drop downside acceleration staring at 10:15 into 10:50 followed by a sawtooth flat line pattern until 12:30 where a rally attempt is tried and falters falling back into 1:20.
another rally attempt starts at 1:20 projected to last into 2:15…
from 2:15 more sawtooth chop into 3:30 where another drop starts into the close